Jeremy Warner's Outlook: Chancellor should look to the mote in his own eye before blaming Opec for high fuel prices

No easy solutions as Japan votes for change; Manduca's baptism of fire at Morrisons

Monday 12 September 2005 23:00 BST

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In fact, the main cause of high fuel prices is not the Organisation of Petroleum Exporting Countries (Opec) or the oil majors, which are in any case already pumping what they've got pretty much flat out, but governments. In Britain, approximately 75 per cent of the cost of a litre of petrol goes to the taxman. True enough, the variable is mainly the price of oil, but not entirely, as besides flat rate excise duty, the government also charges VAT, which as a percentage based tax goes up and down with the price.

So let's not pretend this is a problem governments can do nothing about. To the irritation of other EU member states, Poland has already broken ranks and promised to cut fuel taxes this week, while France has announced further subsidies to hard-pressed farmers. Others are presenting a united front in resisting calls for a cut in taxes, fearing a repeat of what happened in 2000 when the French government caved in, prompting widespread protests elsewhere.

Even in Britain the protesters eventually won a delay in a planned increase in excise duties, though as a point of principle, the Chancellor refused to give way until after the blockades had been broken. This is a man who won't be held to ransom. All the same, it's a bit rich to blame the industry when the real fault lies with extortionate rates of tax.

Nor can the rising oil price be attributed entirely to failure by Opec and the oil majors to increase oil production and refining capacity fast enough to meet growing demand. Here again, the real fault lies with unexpectedly high growth in the world economy. Few would have predicted even a few years ago that growth in China and elsewhere in Asia would have continued uninterrupted as long as it has. Now it's received wisdom that China will be the motor of world growth for years to come.

None the less, the industry isn't entirely beyond reproach. For some years now, these columns have been banging on about the industry's failure to invest sufficiently to recognise the new reality of permanently higher oil prices. This reluctance is understandable enough, if also self interested, for it is arguably more profitable to restrict supply and watch prices surge than meet demand and watch them fall.

Past economic cycles have been characterised by a mad rush of new development and investment as the price of oil begins to peak. This in turn creates an overhang of capacity which exaggerates the scale of the subsequent downturn. Oil producers are determined not to be caught in this vicious circle of new investment again, and with few exceptions they've stuck to their demanding thresholds for development right through the present upswing in prices.

As it happens, there is quite a bit of new capacity due to come on stream over the next few years. There are also indications that with prices so high, demand is beginning to abate. The International Energy Agency reckons that growth in oil usage this year will be only a half of what it was last.

None of this helps with the immediate problem. If the Government wants lower fuel prices, it should cut taxes. Sadly, it's much more likely to respond with higher taxes still, for instance by slapping a windfall profits tax on the oil majors.

The Chancellor has already found ways of extracting more from these behemoths of the corporate stage. They are an obvious target as he struggles to make the numbers add up for his pre-Budget report. Only one problem. If he taxes the oil companies more, they'll only further switch from investing in declining North Sea acreage to elsewhere in the world. The oil industry makes an easy and possibly even popular hit, but a costly one too in the long run.

No easy solutions as Japan votes for change

The Japanese electorate has backed Junichiro Koizumi's agenda for economic reform, vindicating the decision by so many foreign investors to pile back into the Tokyo stock market these past few years. But anyone expecting miracles after Japan's 15 years of near stagnation would be well advised to go take a reality check.

Of itself, postal reform won't pull Japan out of the economic mire. This is not to belittle the significance of the move, which in its own right will make a huge difference to the way the Japanese savings and capital markets work. The Japanese post office is much more than its UK counterpart, both in terms of its place in society and in the way it dominates the Japanese savings market.

This in turn has caused much wasteful, uneconomic and politically directed investment, which over time these reforms ought to correct. Think how hard it is for the British government to court the idea of privatising our own Royal Mail, just an irrelevance by comparison, and then imagine how much more difficult it is for Japan to confront this sacred cow of post-war reconstruction. For Japan, this is a change of seismic importance.

Yet it is not an end in itself and the danger is that once Mr Koizumi has tackled postal reform, that's where he will stop. Japan is still a deeply conservative nation at heart, and despite the fact that the election has purged the ruling Liberal Democratic Party of much old guard influence, this is a country not given to radicalism. Further economic reform isn't going to come naturally. Slow incremental change is the Japanese way, not revolution.

Japan is essentially a tale of two economies. The one we see here in the West is the Japan of electronic gadgetry, state-of-the-art car making and shopaholic Tokyo trendies. Yet alongside this vibrant, internationally competitive Japan lies a vast hinterland of largely protected, inefficient industry and social support systems, which if ever opened to foreign competition would be largely wiped away.

Japan's zero interest rate policy, so important in confronting the problem of price deflation, has also had the perverse effect of supporting a great mass of inefficient and uneconomic industry. If it were forced to pay a realistic cost of capital, much of it would be bust. Still, Mr Koizumi's election win is a start. He went to the country on a back-me or sack-me platform and he won. Japan's appetite for change may be bigger than I'm giving it credit for.

Manduca's baptism of fire at Morrisons

The story of William Morrison Supermarkets since its ill-fated merger with Safeway nearly two years ago has been like watching a slow-motion road crash. One profits warning has followed another as the company's management has struggled to come to grips with an integration for which it appears to have been wholly unprepared. Morrisons has turned into a textbook example of so-called "transactional risk". Far from equalling the hoped for five, two and two has ended up making three at best.

On top of everything else, the group is now threatened with a nationwide strike after allegedly misleading workers over the closure of three distribution depots. Could this prove the final curtain for Sir Ken Morrison, the company's redoubtable chairman, and his chief executive, Bob Stott? It's hard to see how they could survive the humiliation of a supermarket chain with empty shelves. Yet these closures are presumably a core part of the rescue strategy. It looks like being a baptism of fire for the company's latest non-executive director, the former City fund manager Paul Manduca.